Prior Period Adjustment

A Prior Period Adjustment is a correction made in the current accounting period to fix errors or omissions from a previous financial period. It ensures that financial statements reflect accurate and consistent information, maintaining the integrity of financial reporting. These adjustments are typically required when material errors are discovered in previously issued financial statements, changes in accounting principles are applied retrospectively, or ommission of signficant transactions that should have been recorded in a prior period are identified.

It is important to note that prior period adjustments are not used for routine changes in estimates (like depreciation or bad debt allowances), which are handled prospectively.

Key Facts

• Purpose: Corrects mistakes such as misstatements, omissions, or changes in accounting policies.‍
• Impact: Adjusts retained earnings or beginning balances without altering current period income.‍
• Disclosure: Must be clearly disclosed in financial statements with explanations.‍
• Types: Can be due to errors, fraud, or changes in accounting estimates.‍
• Accounting Standards: Governed by standards like GAAP or IFRS requiring transparency.

1. When is a prior period adjustment needed?

When errors from previous financial statements are discovered after those statements were issued.

2. How does it affect financial statements?

It adjusts opening balances of equity accounts, usually retained earnings, without impacting the current period’s income.

3. Does it change current period profits or losses?

No, it corrects prior periods, so current period profit remains unaffected.

4. How should prior period adjustments be reported?

Through notes to financial statements explaining the nature and impact of the correction.

5. Can prior period adjustments relate to tax filings?

Yes, sometimes tax returns are amended to reflect corrected financial information.